What Do The Recent Numbers On The Economy Mean?

Of late, news about the domestic economy have been nearly all positive. Since the beginning of this year, headline inflation (measured on a year-on-year basis) has slowed every month, coming in at 15.9% in October. A tax on incomes, and hence a major let on consumer spending, may, thus, finally be easing after spiking in February 2016, as the monetary policy authority wobbled and fumbled exchange rate policy management.

Still, if you back out the more volatile components of the consumer price index (in our case “food”), the inflation numbers tell a more nuanced story. The “core” inflation index is down from the 17.9% (year-on-year) rate with which it opened the year; but was up in October (12.14%) on the September count (12.12%). The bigger problem though is with “food” inflation. At 17.82% (year-on-year) at the beginning of the year, it closed October at 20.31%. You only need, then, to recall that food accounts for the largest share of the shopping basket of the “man on the street” to realise that despite the salutary picture of the economy painted by the improvement in the headline inflation count, things may not have improved that markedly for the “poor and vulnerable” segments of our society.

Government boosters point to giant strides in the agricultural sector as they pursue a cat’s cradle of reforms there. But if the narrative about nearing self-sufficiency in the production of certain national staples is to make sense, then it might be time to turn policy in the direction of farm infrastructure. The central challenge here is to reduce spoilage, by getting produce from farmgate to the markets in as short a period as possible. Nonetheless, the depredatory activities of pastoralists on farmlands across the country do not just provide faggot for our own “culture wars”, along with changing climate conditions, they may also be imperiling our ability to feed ourselves.

For the most part, most businesses operating in the country have pointed to the direct and indirect costs to their operations from decrepit infrastructure as clear evidence that we are not a low-cost economy. Yet, along with the current government, the rump of our organised private sector would rather contrive much lower interest rates. Unfortunately, inflation is the floor beneath which the domestic cost of money may not fall. Otherwise, naira denominated assets cease to deliver positive real returns, and the naira’s “store of value” proposition is eroded.

Much easier, then for government to focus on bringing domestic costs down, than have the central bank break its vault and vertebrae trying to negotiate borrowing/lending rates down. Better infrastructure would work, no doubt. But a reduction in the number of official and quasi-official agencies and associated procedures necessary to register and run businesses will matter just as much. If this economy is to have a fighting chance of dealing with poverty as economies as diverse as Chile and China have done, then we must complete the transition from “government as provider of goods/services” to “government as regulator of a rule-based, market economy”.

This matter, because the subtle multiple meanings in the inflation numbers do not, however, measure quite as well against the nuanced numbers for how well we have done as an economy. Until the April-June period, domestic output had contracted. Indeed, before the second quarter of the year, the economy’s growth was last positive in the October-December 2015 period. One could argue that with population growth at around 3% annually, the recent rates of output growth (0.72% in the second quarter, followed by 1.40% in the third), are far from adequate. Indeed, it has been suggested that we will need to put in about 10%-15% average annual GDP growth over a generation if we are to make a dent on poverty.

Look beneath the overall GDP numbers for the third quarter, though, and the tale is less nice-sounding. For measuring domestic economic activity, the National Bureau of Statistics (NBS) organises the economy into 46 sectors. Of this number, 21 contracted in the July-September 2017 period, the same number as contracted in the preceding quarter. Of the leading 10 sectors (because, combined they account for close to 83% of total domestic output), six (trade; telecommunications & information services; real estate; professional, scientific and technical services; construction and financial institutions) shrank in the third quarter.

Of the four leading activity sectors which recorded growth in the three months to end-September 2017, crude petroleum and natural gas (about 10% of total domestic output) grew by 25.89%. Chu S. P. Okongwu, a former finance minister, long ago described this sector as an “exclave” of the domestic economy: not responsible for much by way of employment, or productive linkages to the broader economy, it’s major role since 1959 has been, instead, to distort domestic terms of trade in a manner that hurts the competitiveness of domestic industry.

It matters therefore that the non-oil sector continues to put in a dismal shift, shrinking 0.76% in the third quarter. The point about the “fragility” of our recent recovery, one made by just about every commentary that I’ve read on the third quarter output numbers, thus emphasises the point that despite the huge sums of money that the current administration has borrowed, the parts of the economy responsible for nearly 90% of domestic output still struggle to keep their heads above water. Now, if we are ever to be able to meet our debt liabilities when they fall due, it would be important that government’s spending improves productivity and capacity in the non-oil sector.

I have been told that an impatience might be the undoing of analysis such as this. I.e. that government borrowing in support of more robust economic growth will take time to show up in the output numbers. True, this may be. But one only needs to look at the capital expenditure numbers for this administration to put the lie to this argument. Since 1999, we have barely implemented more than 45% of the capital budget annually. And this year, as at the first nine months (i.e. up to September) we have implemented just about 10% of the capital budget.

There may be many routes to “development”. But on the balance of evidence, the Buhari administration has not yet gotten this economy on any such sustainable road! The only other idea more frightening than this, is the realisation that despite one of the most traumatic recessions of recent times (triggered by the bottom falling out of the global oil markets in 2014) Nigeria is back to celebrating oil-price/production-led output growth.

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